With an adjustable rate mortgage, your payment changes almost immediately when the Bank of Canada changes rates to ensure you stay on track with your original amortization schedule. With a variable rate mortgage, your payment stays fixed, but the allocation between interest and principal changes beneath the surface as rates move.
If you are in an adjustable rate mortgage, switching to a variable rate mortgage can keep your payment fixed during rate hikes because the lender adjusts the interest-to-principal split rather than the payment amount itself. This provides payment stability without locking into a five-year fixed rate.
A trigger rate is a threshold built into variable rate mortgages that allows the bank to increase your payment if rates rise above a certain level. According to National Bank research cited in the episode, the probability of hitting this trigger rate is currently very low for most existing variable rate mortgages given adjusted rate forecasts.
Five-year fixed rates are currently priced at a premium, with approximately a two percent spread over floating rates, which means you would be locking in at what could be the height of the interest rate cycle. She suggests a variable rate mortgage offers better peace of mind compared to an expensive fixed commitment.
Because your payment remains fixed while rates rise, a larger portion goes toward interest and less toward principal, meaning your mortgage balance at the end of the term will be higher than it would be under an adjustable rate mortgage.
